F1 set to ride a rocky financial road

For perfect proof of just how badly served Formula 1 was by the Max Mosley-era FIA, look no further than the sale of 21 per cent of its shareholding earlier this week by the sport's commercial rights holder for a whopping $1.6billion (£1.1billion), bestowing upon the commercial rights of the sport a notional value of $9.1billion (£6billion) after factoring in the outstanding loan value of approximately £900million.

To place that into perspective, consider that around 15 years ago, at the height of the Mosley administration, the FIA and thus the de facto owner of F1 - whether current majority lease-holder of said commercial property, CVC Capital Partners, likes it or not - began a process that resulted in the 113-year rights to the sport being sold to an entity controlled by F1 tsar Bernie Ecclestone for just $380million (£250million), including a short-lived (13-year) annual levy paid to the FIA to administer the series.

In 1997, Max Mosley began the process of selling F1's commercial rights to CVC © LAT

The latest transaction is a precursor to F1's Initial Purchase Offer on Singapore's stock exchange - saliently a market that has a more relaxed approach to disclosure than, say, New York, Frankfurt or London - with listing expected within the next six to eight weeks, assuming the money markets don't collapse before then off the back of the Eurozone crisis.

Since 1997, when the initial deal came into effect, octogenarian Ecclestone has three times seen the rights sold on, each time retaining effective control over the business despite heading well north in the age stakes. More to the point, though, is that the perceived value of the rights has multiplied by a factor of no less than 25 over the period.

That pans out at no less than 150 per cent per annum; more saliently, the latest price for said 21 per cent equals the sum paid by CVC in 2006 for three times the shareholding - meaning the vulture fund has not only paid off a vast portion of the (billion-dollar) debt it incurred to purchase its share of the rights, but stands to make a 300 per cent profit all in five years on top of that!

Lest there be any argument about the opening paragraph of this column, the foregoing surely places it in stark perspective - in the process underscoring precisely how myopic was the FIA's General Assembly when it approved the deal back then.

According to sources in the room at the time, having previously called for a tender process, Mosley introduced the subject of a sale of ALL the commercial rights to the FIA's sporting properties for a 13-year period (initially 10, but increased due to implementation delays), made a brief presentation - and then recused himself during the voting process so as to 'wash his hands' of any involvement.

When, around four years later, the EU Commission gave its conditional approval to the deal, the period had grown by no less than a century to 113 years - with Ecclestone being forced to relinquish his ownership of series such as the World Rally Championship, truck racing and touring cars.

Seems a fair deal: increase the validity of the lease by over 600 per cent at no extra cost and drop the annual $10million (£7million) levy after 10 years, in exchange for ridding oneself of nuisance championships such as gravel racing, a lorry championship and some tin-top series...

By 2001 Bernie no longer owned the rights to show off the talents of McRae and co © LAT

Still, once the family silver is sold it remains out of reach - as current FIA President Jean Todt discovered when he attempted to untie the deal - but if there is one redeeming aspect to all this it is the so-called 'Don King Clause' - named after the infamous boxing promoter - that gives the FIA the right to oppose any deal of which it does not approve, particularly where majority ownership has changed. Consider this as being similar to a clause in a tenancy agreement: a landlord is entitled to revoke any sub-lease of which he does not approve.

However, as with most contracts entered into during ex-barrister Mosley's tenure, the provisions are suitably vague, and so it would likely require a court of law to rule on 'controlling' 'fit and proper person', 'approve' and 'majority' - factors CVC are not banking on ahead of the planned listing, for any intervention by the FIA could scupper the IPO.

Hence comments made by CVC that "CVC will continue to be F1's largest and controlling shareholder" - but, then, to paraphrase Mandy Rice-Davies of Profumo infamy, the investment fund would say that, wouldn't it. According to sources, the 21 per cent sale, believed to have been concluded three months ago but strategically kept under wraps, excluded associated voting rights; thus, although the deal has diluted CVC's holding to around 42 per cent, meaning the fund no longer holds an outright majority, CVC has apparently retained the voting block over the shares sold. Still, ownership has changed.

Thus, on face value, it would seem the FIA has every right to challenge the listing in a court of law, which would not only prove disastrous for the IPO, certainly in the short-term, but also force greater transparency of a deal Mosley and Ecclestone (and CVC et al) would no doubt prefer kept as far from the public eye as much as the current FIA administration wishes it exposed. Could it come to that? Absolutely, and one wonders whether the FIA was even made aware of the 21 per cent sale.

Would, it, though, come to that? Here only the FIA alone knows, but the next four weeks are sure to force the governing body to show its hand - which may hold all the aces, or none at all.

However, the FIA is not alone in having the potential to scupper the IPO, for, apart from the global economic crisis (of which more below), Mercedes has the power to severely dent the IPO by either refusing to commit to the sport long-term or challenging any extension of the current Concorde Agreement - the tripartite document that binds FIA, CRH and the 12 teams and sets out their respective obligation - which is, in turn, crucial to investor confidence.

Mercedes head honchos have the power to scupper F1's IPO © LAT

Just why Ecclestone made, with, one must assume, CVC's support, Mercedes a derisory Concorde offer, one that severely disadvantages a company that has spent billions on the sport since (re) entering in 1993. Still, it is beyond the ken of most in the paddock, but one must assume he sees the Three-Pointed Star as a threat to his governance and wishes it would 'do a Renault' and withdraw as team owner to concentrate on engine supply.

That way the company would hold no sway in Concorde or the all-powerful F1 Commission, while still adding value to the sport through its presence as power-unit supplier. However, Ecclestone, known to be the sort of gambling man who bets on two flies buzzing up a wall, could be bargaining on the premium motor company - according to Interbrand, the 12th top brand in the world and second behind Toyota in the automotive stakes - backing down. (By contrast, Interbrand has ranked Ferrari in 99th place, behind John Deere tractors...).

Yes, Mercedes wishes to extend its commitment to F1, particularly after its maiden victory (during its current campaign), but is unwilling to remain in the sport at any cost, particularly when coupled with obvious disdain from its commercial rulers. Equally, a full withdrawal on a 'scorched-earth' basis would mortally wound the sport, for the existing engine suppliers have expressed themselves unable (unwilling?) to step into the breach. Not only would one team be lost, but McLaren and Force India would be left without engine supply. Unless this deadlock is resolved sooner rather than later, the effects on the IPO could well prove extremely serious.

Also a threat for F1's IPO is the Facebook fiasco - in less than a week the social website's much-vaunted stock lost almost 20 per cent of its value, with an investigation into allegations into claims "that Facebook's IPO documents contained untrue statements and omitted important facts, such as a severe reduction in revenue growth". This despite being listed on Wall Street, and not in Asia.

Not only will such action promote severe investor jitters at a time when all stock exchanges are on red alert, but the stocks owners' propensity towards opaqueness could well result in legal challenges after the listing. Just what F1 needs after Spygate, Crashgate, Dungeongate and Gribkoskygate - all of which severely tarnished F1's image across the world. So much so, in fact, that anecdotes have it that school kids would rather tell their teachers that daddy works as a stripper than front up that he is chief development engineer at a title-winning F1 team...

Formula 1 is more popular than ever as a TV sport, but track spectating is a different matter altogether © LAT

A 20 per cent on a notional value of $9billion would drop F1 into the $7billion range (the lower end of the most optimistic forecasts of those who lick the crumbs off Ecclestone's table on a weekly basis), and, unless the sport proves up to exponentially growing its financial performance on a quarterly basis, the value could plunge faster than grandstand ticket sales at Barcelona. Already analysts are revising estimates downwards, while institutional investors known to this column have scratched the IPO off 'must-buy' lists despite having billions to splash.

Monaco, arguably F1's most watched race, will provide the acid test for potential investors: ticket sales are said to be well down on last year, which in turn was down on 2010, when under 40,000 punters paid to watch the race, while the first day of track activities in Monaco this year has revealed a harbour emptier than at any race in the past 20 years. White spaces galore are expected on the walls and track surrounds due to a lack of take-up by advertisers, while yacht charters are said to be facing ruin after committing to boats for which they now have no takers.

Yes, rip-off prices are partially to blame - but investors care only about that which is tangible, and this weekend much will be precisely the opposite.

Valencia at the end of June is likely to be the final race ahead of the proposed listing, and if past events at the 'urban' circuit - plus the Spanish Grand Prix a fortnight ago, for which just 62,000 tickets were sold against a 2006 high of 140,000 - are any guide, very nifty camera work will be required to allay investors fears. That, or drop-in crowd shots, as has increasingly become the norm. Either way, helicam is likely to be conspicuous through absence...

Adding to the confusion are suggestions, first aired in this column in March, that F1 intends sideling the FIA as regulator, thereby enabling the holders of the commercial rights to control the sport in-house, as is already the case with GP2, which falls under the same commercial umbrella.

Further, the teams are now said to be rebelling against the introduction of eco-friendly V6 power units (and associated chassis changes) on cost grounds amid the crisis, and there is little doubt the CRH is fuelling this fire very nicely - for what better way of haggling over any outstanding IPO matters with the FIA, which is committed to a 'green' F1?

Thus one or two potential court cases, a mooted overhaul of the sport's regulatory structure, possible binning of technical future regulations, significant reduction in controlling interest by the majority shareholder, blue-chip races with sparse attendance, and a listing on one of the world's less transparent exchanges point to extremely challenging times for F1 in the weeks ahead.